Fixing the super rort doesn't equal warfare

While conservatives balk at the prospect of any new superannuation taxes, the poor are left paying more than their fair share by the old ones, writes Mungo MacCallum.

Another week, another anticlimax. The great superannuation showdown turned out to be a case of Small Changes at the Top, Not Many Hurt.

This did not stop the Weekend Australian running the breathless kicker: 'CLASS-WAR' TAX HITS WEALTHY RETIREES. Actually, the tax targets just 16,000 people, all of whom are very wealthy indeed - the "fabulously rich" identified by Craig Emerson.

And when we get to the fine print, it appears that the legislation is unlikely even to be introduced, let alone passed, before the election, after which Tony Abbott will presumably abandon it. Some class war.

Obviously Gillard and Swan were not prepared to risk a direct confrontation with the heavily cashed-up industry, which had been preparing a blitzkrieg advertising campaign of the kind successfully mounted by the miners if the government threatened any real reform. And this is a pity, because there is a strong case for, if not outright warfare, at least serious reform of what has become a blatant rort - a redistribution of income from the poor to the rich.

Superannuation is taxed at a flat rate of 15 per cent. Like any flat rate tax this is regressive; it has its most severe impact on the poor. For someone on $30,000 a year, the loss of $4,500 is a hefty slug, which can have a serious effect on living standards. But for those on $300,000 a year, $45,000 makes little real difference; with an annual income of more than a quarter of a million, they are, whatever Joel Fitzgibbon says, hardly likely to struggle.

So you have a basic inequity to begin with. But it gets worse because the flat rate super tax is an open invitation to the rich to indulge in legal tax avoidance. The real poor pay an effective tax of around 15 per cent anyway; there is little incentive for them to get into superannuation, which is why the government introduced the low-income superannuation contribution of up to $500 a year to encourage savings. But those on top incomes would normally pay the top rate of 45 per cent on the money they can park in super at a third of the cost.

It's money for jam, a no-brainer. And even doubling the rate to 30 per cent, as was the original proposal, would leave them substantially better off. But it would provide a measure of financial justice and a handy chunk of revenue to be spent on more worthwhile causes.

The funds and their supporters argue that such reforms would cause the rich to withdraw their money. Or to stop saving for retirement altogether and live on the old age pension. But the sort of people we are talking about would never qualify for the pension under the current means test, and would never want to.

The Australian's house economist Judith Sloan predicts with apparent approval that they would simply transfer the money to other tax lurks, such as negative gearing. Well, they might - although an effective tax concession of one third still looks pretty good to me. But if they did, that would just be another loophole to close. It is hardly a reason to leave the present shamelessly unjust system untouched.

Sloan and her colleagues in the Murdoch media take the reverse view: any change would entail not the end of a tax concession - a subsidy to the rich - but a new tax, a raid on the hard-won savings of those who have diligently prepared for a comfortable retirement. As one of them put it: if I live in a $2 million house but have savings of $100,000, I'm all right, but if I live in a $100,000 house and have savings of $2 million, I'm super rich and they want to tax me. What's fair about that?

Quite a bit, actually: for starters, very few people with savings of $2 million actually live in $100,000 houses, and if they do, it's their own quirky choice. And on the other side, there is a strong argument that the family home should no longer be considered off limits when assessing assets.

But Sloan would recoil from the mere suggestion: new taxes are bad, by definition. She clearly belongs to the anarcho-capitalist school of economics which enjoyed a brief boom in the middle of the last century under such luminaries as Murray Rothbard, whose motto was: "Taxation is theft."

Coming from a right-wing polemicist like Sloan, this doesn't matter much, but it is more disturbing to hear the man who will probably be our next prime minister espouse a similar line. When the Government unveiled it innocuous reform last week, Tony Abbott declared flatly: "This is a government which is prepared to tax the people to fund its own spending."

Well, duh. Governments levy taxes to fund their programs - to build schools and hospitals, run the defence force, and look after the needy by setting up a national Disabilities Insurance Scheme, which Abbott whole-heartedly approves. Taxation is not theft; it is not even a necessary evil. It is a public good, without which we would lapse into ... well, anarcho-capitalism, the law of the jungle, red in tooth and claw.

This more rational view was memorably put by the great American jurist Oliver Wendell Holmes: "I like to pay taxes. With them I buy civilisation." And with them, we might add, we pay for Judith Sloan's various academic stipends and probably purchased the best part of her education; and we also employ Tony Abbott on a government program out of which he has already done very well and plans to do much better.

Certainly the current system is far from perfect and successive governments have balked at the task of radical reform. But no-one, not even Tony Abbott, believes that the answer is to ditch it altogether. He wants to get rid of the carbon tax, and the mining tax, which is supposed to fund the low income superannuation contribution - that would go too, a real raid on the savings of those who can least afford it. But to scrap the source of revenue that pays his own salary? As his mentor might say: enough is enough.

Mungo MacCallum is a political journalist and commentator. View his full profile here.